Richard C. Longworth, senior fellow at The Chicago Council on Global Affairs, contributes his knowledge and ideas about issues that affect the Midwest.

Wednesday, July 11, 2012

Some Summer Stories

Vacation's over and it's time to catch up on the news. There's a lot of it, from the weather, to ethanol, to vacant airports: whatever happened to the dog days of summer? Herewith some thoughts on stories that popped out of newspapers awaiting me on my return.

Every Midwesterner knows we're in a hot dry summer. But it's farmers, suffering through a drought after that hot-and-cold spring, who are truly singing the blues. Talk to vendors in farmers' markets and you hear nothing but woe. Peaches are all but wiped out. The apple crop is down. U-Pick-Em blueberry farms are turning away tourists: the crop this year is too small.

The corn crop is the big story. The U.S. Department of Agriculture says about 40 percent of the crop in Iowa is in "good or excellent" shape, compared to 82 percent last year. Other states report the same. If we don't get big rains soon -- not just showers, but true soakers -- it's going to get worse.

This has implications that are truly global. Corn prices are already up to $7.33 per bushel, and rising. This is up from $5.50 a month ago. As the world's biggest corn producer, the Midwest sets world prices. Rising corn prices raise the cost of food everywhere, from tortillas in Mexico to bread in Egypt to poultry and meat in China, where growers depend on Midwestern corn and soybeans for protein.

Apart from human concerns, why is this important? Well, consider what happens if the price of bread rises in Egypt. Past bread price increases there have triggered riots. Egypt right now is going through the third or fourth act of its Arab Spring, with a newly elected Islamist government vying with the military for power. The last thing Egypt, and the Mideast, need right now is bread riots.

All this would be eased if more of the corn crop could be exported, instead of going into ethanol plants to make alternative fuel. But about 35 percent of the U.S. corn crop goes into ethanol production, creating an artificial demand that pushes prices even higher.

And speaking of ethanol:

An excellent article in the Chicago Tribune ("Ethanol Producers Feeling Pinched," July 8, 2012) reported the first glimmerings of what will certainly, sooner or later, become a full-fledged Midwestern crisis -- the collapse of the ethanol industry. Ethanol output is down, it said, profits are at record lows, and plants are closing.

It's heresy to say this in the corn-growing areas of the Midwest, but ethanol is a boondoggle. Its long-term viability depends on continued high and stable prices for two of the planet's most volatile commodities, corn and oil. Right now, the price of corn is up, which makes ethanol more expensive to produce, while the price of oil is relatively low, which makes it cheaper to sell.

First result: vanishing profits. Second result: the imminent popping of a farm bubble. With ethanol and corn prices high, farmers got rich. When farmers get rich, they borrow to buy either land or machinery. Soon enough, prices go down again, the banks see their collateral collapsing, and they start calling in the loans. This happens regular as clockwork, and it's going to happen again.

Ethanol production stays high because the federal government has mandated that corn ethanol replace part of fossil oil in American gasoline. Ethanol output now stands at about 14 billion gallons per year, triple the amount seven years ago but far below the 36 billion gallons which the government has mandated by 2022.

Let's think about that a bit. That means two and a half times as much ethanol in 2022 as now, which means two and a half times as much corn going into ethanol plants. Unless someone can figure out how to double Midwestern corn output, that means lower exports and higher prices for a hungry world.

Between now and then, something is going to pop. The government recently ended subsidies and tariffs for ethanol production. At the time, oil prices were high, so no one much noticed. But as oil prices go down, so do ethanol prices, taking profits down with them. This means more plant closures and lost jobs.

It's time to recognize ethanol as the artificial industry it is, and end the mandate. But this isn't about to happen, because these plants support towns across the Midwest that would collapse without them. So ethanol has a political and social clout that goes far beyond its economic value.

All this reminds me of the old Soviet Union, where the government put factories where it wanted people to be, whether these factories had any economic purpose or markets. For 70 years, the Kremlin kept these factories and their cities going. Eventually, the Soviet Union collapsed, the subsidies ended and both the factories and their cities crumbled.

I'd hate to say that America's ethanol policy was modeled on Gosplan, but there it is.

Finally, a story in the New York Times talked about lost business at major airports, and singled out such cities as St. Louis, Cincinnati and Pittsburgh. St. Louis' Lambert Airport, once the hub for TWA, now offers less than half the number of daily departures it once did. Business also is down at Cincinnati, where Delta has downsized its hub and where daily departures are down 75 percent, and at Pittsburgh, a former US Airways hub.

The Times pointed out the cost of maintaining unused concourses or hangars, or finding new means for them. Tearing them down costs too much but maintaining them is wasted money.

But there's more to this than the upkeep of empty buildings. A city that loses its flights to and from the world also loses its connection to that world.

It's like a town that is far from the Interstate, or that loses its passenger train service. It's still possible to get there, but it's harder and, in time, people stop trying. Global businesses that need to fly employees around the world move to cities that have international links. Business travelers schedule meetings somewhere else, in cities where it's easy to fly in and easy to fly out. A city with shrinking air service becomes a backwater.

The next time you read about an airline merger, say a little prayer for the city and its airport. Chances are they've just been merged out of the global economy.

2 Comments

Cincinnati's hub was always a double edged sword. For many years they had the nation's highest fares as Delta had a stranglehold on local flights. However, they fortunately were able to get Delta to guarantee the costs of a lot of the expansion, so they aren't stuck with it. It wasn't in the article, but Indianapolis also took a huge financial bath on a United Airlines maintenance center there that closed years ago and for which the still owes many millions in bonds.

Definitely a lack of non-stop flights (and non-stop flight frequency), even domestically, is a big issue for business in these smaller cities. It's one of the many ways that scale issues work against them. (Of course scale issues also work for them in some regard).

I would think this is a good example of a potential basis of cooperation with Chicago. Airlines themselves may be bad because people will generally connect through any hub they can depending on what is cheapest, not necessarily the closest one. But in many ways these smaller cities need to connect to global networks through global hubs. This is a way the fortunes of Chicago and its Midwestern tributaries are linked. It also links Chicago's role as the capital of the Midwest to its global ambitions.

Here's more out of Cleveland. Looks like local government attempting to preserve their hub, which I would say seems doomed to fail unless all of northeast Ohio commercial air service is consolidated at Cleveland:

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